Will Shale Kill Off The Oil Price Rally Again?

WTI has rallied more than 11 percent over the past month, raising hopes from oil bulls that maybe, just maybe, the price gains are here to stay. Oil had dipped in February and March on record high levels of oil sitting in U.S. storage, but by April, the market is starting to look tighter.

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The oil market bust is closing in on the three-year mark, and there are growing signs that things could finally be moving in the right direction.

Despite the record high levels of crude oil storage in the U.S., inventories are falling pretty much everywhere else. South Africa, the Caribbean, Nigeria, and Iran are all reporting lower inventory figures, although the reasons vary. Iran cleared out its fleet of floating storage, which had built up during years of sanctions that prevented the Islamic Republic from exporting to its full potential. That backlog of oil has now been worked through and Iran could have trouble lifting exports. In fact, Iran’s exports have been flat since last summer.

Europe also has high levels of oil and refined products sitting in storage, but total levels are down from 2016. And like the U.S., the past few months have been quiet ones for refiners. That suggests that inventories should start seeing some more meaningful declines in the months ahead as refineries ramp up.

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According to FGE, and reported on by Reuters, total product stocks across the U.S., the Amsterdam-Rotterdam-Antwerp region, plus Singapore and Japan, declined by a combined 6.5 million barrels – a sign of market tightening. Storage is still exceptionally high, but converging down towards long-run averages. Outside the U.S., accurate data is hard to come by, so these snippets offer some clues into broader market trends.

"Across the first quarter of the year, crude stocks built by much less than they did in the first quarter of last year even though refinery maintenance globally was much heavier," Energy Aspects analyst Richard Mallinson told Reuters.

According to SEB, even the record high levels of U.S. inventories are not as bad as they seem. While the buildup is in part due to rising production, they are also the result of refining maintenance season. Lower refining runs means fewer barrels bought up by refiners, which leads to higher storage. But that is, of course, a seasonal trend. With the driving season rapidly approaching, U.S. inventories are expected to decline.

American motorists should start to feel the effects of a tightening market. Gasoline prices across the U.S. jumped by an average of 11 cents per gallon this month, sitting at $2.42 per gallon. That is now the highest national average since September 2015.

Market sentiment is starting to turn bullish. For the week ending on April 4, hedge funds and other money managers stepped up their net-long positioning, the first increase in six weeks, reflecting a general feeling that the recent dip into the $40s was temporary.

Looking forward, there are more reasons to be bullish. Demand is on the rise. Saudi Arabia just announced that it had cut deeper in March, taking output down to 9.9 million barrels per day. The OPEC extension seems to be on track. Also, driving season and the end of refining maintenance should start to drain U.S. inventories, which is arguably the most important metric right now holding back more gains in oil prices. “People have been picking up on the bullish indicators in the market ahead of the seasonal draw in crude stocks,” David Wech, an analyst at JBC Energy GmbH, told Bloomberg.

But there is also the chance that the more than 10 percent rally in oil prices over the past month starts to fizzle – once again disappointing traders who are betting on rising prices. Although bullish bets on WTI futures increased recently, the positioning is more balanced than it has been for most of this year, reducing the speculative pressure on crude prices on the upside.

Then there is the comeback of U.S. shale to consider. Production is up to 9.2 mb/d and rising, a gain of nearly 700,000 bpd from last summer.